To help countries meet their greenhouse gas emission targets under the Kyoto protocol, and to
encourage the private sector and developing countries to contribute to emission reduction efforts,
three market-based mechanisms were included in the Protocol – emissions trading, the clean
development mechanism and joint implementation. In the following interview for this Newsletter, John
Kilani, recently appointed Director of the Sustainable Development Mechanisms programme at the UNFCCC
secretariat, talks about the important and expanding role of these mechanisms in tackling climate
change.

What is the role of the market-based mechanisms which you now help oversee?

They have many roles, but principally they bring the strength of the private sector and market forces
to bear on the problem of climate change. Putting a price on emissions created added incentive for
countries and companies to invest in efficient technologies. They also provide flexibility. Countries
and companies that manage to emit below their cap have emission units to sell, those that go over
their cap must look to the market. The two project-based emission reduction mechanisms, the Clean
Development Mechanism (CDM)and Joint Implementation (JI), are linked to international emissions
trading, in as much as the emission units they generate can be traded and used for compliance
purposes under the Kyoto Protocol. Together, the three are known as the flexible mechanisms.

The carbon market has its strong proponents, and its ardent detractors. What should one
draw from these opposing viewpoints?

Its clear that there are many views on how to tackle climate change. My view is that it will probably
take all the tools at our disposal, and one of the main tools is the market. The ability to buy and
sell emission units gives countries and companies necessary flexibility in how they plan for and meet
their reduction commitments. Ultimately, however, it comes down to binding commitments to reduce,
like those required under the Kyoto Protocol. Without such commitments, there is no market. I think
the bulk of the criticism of the market stems from confusion over its role. The market can help
identify lower cost opportunities to invest, it can help companies plan their investments and
expenses well into the future, but buying and selling emission units, per se, doesn’t reduce
emissions.

The clean development mechanism has grown fast, but it seems that lesser developed
countries are missing out. What is being done to expand the reach of CDM?

The CDM has indeed gotten off to a quick start. There are already more than 1160 projects in 49
countries. These projects assist developing countries achieve their sustainable development goals,
they help identify lower cost opportunities for emissions reduction, they stimulate investment flow
to developing countries, and they help put developing countries on a clean path to development.
That’s a lot to ask a single mechanism, but the CDM is achieving all of this. What it
hasn’t been able to do to date is to stimulate projects, in acceptable numbers, in lesser
developed countries, especially in Africa. Effort has been made in a concerted way since the
beginning of 2007 to correct this, and the good news is that it seems to be working.

Under the Nairobi Framework, partner agencies and multilateral development banks – UNFCCC,
UNEP, UNDP, the World Bank and African Development Bank – have been increasing the capacity of
lesser developed countries to take part in CDM, they’re helping to set up designated national
authorities in host countries to promote and approve projects, and they’ve been raising
awareness, through events such as the Africa Carbon Forum held recently in Senegal. There are now 27
registered projects in Africa, and about another 44 projects in the validation–registration
pipeline. It’s a small number compared to the total worldwide, but when you look at the
investment that these projects represent, you see CDM is well worth pursuing. Those 27 registered
projects in Africa are expected to stimulate USD 3.9 billion in capital investment What’s
more, the World Bank came out recently with a study that indicates Africa has great potential for a
wide range of CDM projects, large and small.

We seem to hear far less about Joint Implementation. Where does JI stand, and what do you
see as its potential?

Joint Implementation is positioned now to deliver. Its start, in terms of project submissions, has
been slower than earlier expected, but now with over 150 project design documents and five final
determinations through the Joint Implementation Supervisory Committee, we can expect continued
submission over the next year. It won’t be a tidal wave of projects perhaps, but still a
growing presence of JI projects in the market. There is also Track 1 JI, with host countries vetting
projects themselves. To date, 19 indications of Track 1 projects have been received, requesting
identifiers for accessing the international transaction log. So now there are two viable approaches
to JI. Overall it is fair to say the potential for JI in this commitment period is still around a
couple of hundred million tonnes, despite recent suggestions from some market players of a decrease
from earlier expected levels.

Much is riding on the international climate change negotiations now under way. How do the
Kyoto Protocol mechanisms factor into these negotiations?

Yes, the Parties to the Kyoto Protocol and the Convention are extremely busy negotiating what will
happen when the first commitment period of the Kyoto Protocol ends in 2012. These negotiations need
to be concluded in December 2009 in Copenhagen. How climate change action will be financed is a
central theme of the on-going negotiations. Parties have said that the carbon market and market-based
mechanisms, like the CDM and JI, should continue, but that they could be improved. Therefore, much of
the discussion in negotiations revolves around ways to take better advantage of the market and market
mechanisms. Given the huge shift in investment, and new investment, that addressing climate change
will require, it’s appropriate that Parties are looking at ways to scale up and improve market
mechanisms.